Cut emissions, not the economy

In July, the European Commission is expected to bring out its ‘urgent’ review of the European Union’s emissions-trading scheme. This presents the opportunity to re-set a floundering yet ultimately sensible system so that it supports low-carbon investment in a technology-neutral fashion. However, what seems more likely is that the adjustments will remain minor and Europe will continue to invest its hopes in non-market-based initiatives, such as new binding market-share targets for renewable technologies.

A frank debate about Europe’s energy future is needed – not only because regulatory uncertainty is the number-one risk factor that renders Europe less attractive for much-needed energy investments, but also because current policies have produced absurd outcomes:

On the one hand, support schemes for renewable energies have spiralled out of control. For example, Spain recently had to pull the plug on its renewable industry because the price of electricity had risen 17% above the European average due to a fivefold increase in government subsidies. This is not sustainable, especially in times of economic crisis and financial turmoil.

On the other hand, heavily polluting coal and lignite plants are celebrating a revival under the current regulatory regime. In Germany alone, 11 gigawatt of coal power is planned for next year. Natural gas, which is by far the cleanest fossil fuel and a vital back-up for renewable energy sources, is being squeezed out.

Rather than ‘picking the winners’, the Commission should live up to its mantra of an open energy market and fair competition. An unbiased and market-based approach would avoid messy experiments that cost billions for European taxpayers and consumers. Why not ensure that the decarbonisation of Europe proceeds on the basis of cost efficiency?

Let me give you just one example. In the power sector, the EU could achieve an 80% cut in carbon dioxide by replacing old coal plants with new gas-fired plants. By 2030, this would save €250 billion-€500bn, compared to a pathway with a 60% market share for renewables.

Admittedly, the EU is considering support options for other technologies as well, such as gas-fired power plants in Germany. But rather than working on a case-by-case basis, it would be far more logical to create a carbon market that simply tilts in favour of the most efficient solutions, regardless of the technology. The gas industry does not need subsidies; it needs a level playing field.

Although flawed in its application, the emissions-trading scheme (ETS) provides the basis for a sensible market-based regime. The amount of carbon that can be emitted until 2020 is fixed by law, and polluters are able to choose how to reduce their impact. If properly set up, the system would ensure a fair and flexible approach to bringing down emissions, an approach far less cumbersome than targets for individual technologies. The Commission’s review of the ETS needs to create momentum for a fundamental re-set of the system so that it provides adequate support for low-carbon investment, including in gas.

Rather than ‘picking the winners’, the Commission should live up to its mantra of an open energy market and fair competition.

Let me be very clear: renewable energy sources will have to play an important role in Europe’s energy future, and gas will be a natural partner for that. But setting another round of binding renewable targets (as implied by the Commission’s latest communication on renewable energy), in addition to CO2 reduction obligations and the ETS, would not enable the market to find cost-efficient solutions. Instead, it smacks of an arbitrarily planned economy. If the EU intends to fight climate change, it should measure success in tons of emissions saved rather than the market share of cherry-picked technologies.

Europe’s economy would be best served by a market-driven and technology-neutral framework. Whatever the outcome of this debate and the future of EU climate policy, the message cannot simply be ‘keep at it’. Brussels needs to cut carbon emissions, not the economy, if it wants to avoid an industrial ‘sunset of Europe’.

Aleksandr Medvedev is deputy chairman of the management committee of the Russian energy group Gazprom and director-general of Gazprom Export.

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Michael Hogan

Mr. Medvedev’s ostensible concern for Europe’s GHG abatement objectives is unmasked by some convenient oversights. To keep it simple, let’s address his “one example”. The only way – the ONLY way – a switch from coal to natural gas in power generation could possibly achieve an 80% reduction in GHG by 2030 is by deploying carbon-capture-and-storage technology on gas-fired power plants on a massive scale by 2030. The gas and power industries have steadfastly refused to finance development of this technology to the level necessary to achieve anything close to such an objective. The daunting technology risks associated with this pathway are one of the primary reasons that deliberate support for continued renewables deployment is essential. As Churchill said exactly a hundred years ago, energy security lies in diversity and diversity alone, and allowing a carbon pricing regime to drive Europe to a single-fuel strategy would be the height of foolishness. As a recent macroeconomic study by Resources for the Future (in the US) has shown, other factors may come into play that would actually result in virtually no reduction in overall GHG emissions from simply relying on a coal-to-gas switch; the study found, not surprisingly, that while coal-to-gas switching had great value it could only be effective if paired with strong support for renewables and energy efficiency. Mr. Medvedev’s concern for Europe’s economy and GHG abatement objectives turns out, in reality, to be a well-crafted subterfuge to promote greater use of Russian natural gas. Nothing wrong with that – he is, after all, an officer of Gazprom and is bound by fiduciary responsibility to promote Gazprom’s interests – but let no one be mistaken as to what this is all about. Michael Hogan

Posted on 7/23/12 | 8:20 AM CET

Michael Hogan

Mr. Medvedev’s ostensible concern for Europe’s GHG abatement objectives is unmasked by some convenient oversights. To keep it simple, let’s address his “one example”. The only way – the ONLY way – a switch from coal to natural gas in power generation could possibly achieve an 80% reduction in GHG by 2030 is by deploying carbon-capture-and-storage technology on gas-fired power plants on a massive scale by 2030. The gas and power industries have steadfastly refused to finance development of this technology to the level necessary to achieve anything close to such an objective. The daunting technology risks associated with this pathway are one of the primary reasons that deliberate support for continued renewables deployment is essential. As Churchill said exactly a hundred years ago, energy security lies in diversity and diversity alone, and allowing a carbon pricing regime to drive Europe to a single-fuel strategy would be the height of foolishness. As a recent macroeconomic study by Resources for the Future (in the US) has shown, other factors may come into play that would actually result in virtually no reduction in overall GHG emissions from simply relying on a coal-to-gas switch; the study found, not surprisingly, that while coal-to-gas switching had great value it could only be effective if paired with strong support for renewables and energy efficiency. Mr. Medvedev’s concern for Europe’s economy and GHG abatement objectives turns out, in reality, to be a well-crafted subterfuge to promote greater use of Russian natural gas. Nothing wrong with that – he is, after all, an officer of Gazprom and is bound by fiduciary responsibility to promote Gazprom’s interests – but let no one be mistaken as to what this is all about. Michael Hogan

Posted on 7/23/12 | 8:20 AM CET

Michael Hogan

Mr. Medvedev’s ostensible concern for Europe’s GHG abatement objectives is unmasked by some convenient oversights. To keep it simple, let’s address his “one example”. The only way – the ONLY way – a switch from coal to natural gas in power generation could possibly achieve an 80% reduction in GHG by 2030 is by deploying carbon-capture-and-storage technology on gas-fired power plants on a massive scale by 2030. The gas and power industries have steadfastly refused to finance development of this technology to the level necessary to achieve anything close to such an objective. The daunting technology risks associated with this pathway are one of the primary reasons that deliberate support for continued renewables deployment is essential. As Churchill said exactly a hundred years ago, energy security lies in diversity and diversity alone, and allowing a carbon pricing regime to drive Europe to a single-fuel strategy would be the height of foolishness. As a recent macroeconomic study by Resources for the Future (in the US) has shown, other factors may come into play that would actually result in virtually no reduction in overall GHG emissions from simply relying on a coal-to-gas switch; the study found, not surprisingly, that while coal-to-gas switching had great value it could only be effective if paired with strong support for renewables and energy efficiency. Mr. Medvedev’s concern for Europe’s economy and GHG abatement objectives turns out, in reality, to be a well-crafted subterfuge to promote greater use of Russian natural gas. Nothing wrong with that – he is, after all, an officer of Gazprom and is bound by fiduciary responsibility to promote Gazprom’s interests – but let no one be mistaken as to what this is all about. Michael Hogan

Posted on 7/23/12 | 8:20 AM CET

Michael Hogan

Mr. Medvedev’s ostensible concern for Europe’s GHG abatement objectives is unmasked by some convenient oversights. To keep it simple, let’s address his “one example”. The only way – the ONLY way – a switch from coal to natural gas in power generation could possibly achieve an 80% reduction in GHG by 2030 is by deploying carbon-capture-and-storage technology on gas-fired power plants on a massive scale by 2030. The gas and power industries have steadfastly refused to finance development of this technology to the level necessary to achieve anything close to such an objective. The daunting technology risks associated with this pathway are one of the primary reasons that deliberate support for continued renewables deployment is essential. As Churchill said exactly a hundred years ago, energy security lies in diversity and diversity alone, and allowing a carbon pricing regime to drive Europe to a single-fuel strategy would be the height of foolishness. As a recent macroeconomic study by Resources for the Future (in the US) has shown, other factors may come into play that would actually result in virtually no reduction in overall GHG emissions from simply relying on a coal-to-gas switch; the study found, not surprisingly, that while coal-to-gas switching had great value it could only be effective if paired with strong support for renewables and energy efficiency. Mr. Medvedev’s concern for Europe’s economy and GHG abatement objectives turns out, in reality, to be a well-crafted subterfuge to promote greater use of Russian natural gas. Nothing wrong with that – he is, after all, an officer of Gazprom and is bound by fiduciary responsibility to promote Gazprom’s interests – but let no one be mistaken as to what this is all about. Michael Hogan